After Slashing Drug Prices, Is it Time to Jump Back on the Eli Lilly Bandwagon?
I see an opportunity to short the pharmaceutical giant ahead.
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Remember former Sarge fave Eli Lilly LLY? If you do, you may remember that I got out of the stock in late-ish June, the stock went up a bit after I sold it, but then sold off hard less than a month after that sale.
When I say "hard," I mean hard. LLY went down 22.6% from mid-July into early August. I looked like an idiot for a couple of weeks, then I looked like a bona-fide genius. Now, before August is even out, I'm starting to feel a bit like a moron again. The stock is now up almost 14% since making that bottom.
Back to the news. We all know that the GLP-1 treatment war for obesity, diabetes and perhaps other maladies had become a two-horse race between Eli Lilly and Novo Nordisk NVO. This drug or drugs, because there are different brand names for different ailments for each manufacturer. For Eli Lilly, Mounjaro is marketed as a treatment for Type 2 diabetes, while Zepbound is marketed as a treatment for weight loss. There are several other biotech/pharmaceuticals working on competing treatments, but these two were early to market and appear to have taken a significant lead.
The News
On Tuesday morning, Eli Lilly announced that it was slashing prices for the two lowest doses of the Zepbound weight loss medication. Now, a four-week supply for Zepbound at 2.5 mg and 5 mg doses will list for $399 and $549, respectively, at LillyDirect. That's down from the current price of $1,060 for a four-week supply in auto-injector pens. Two glaring downsides would be that these lower doses when purchased on the firm's self-pay site will not be covered by insurance and the fact that the less expensive option won't come with the injector pen. Patients will have to use an old-fashioned syringe.
The question now becomes, that by making the treatments more affordable for those that might not have insurance, or their insurance won't cover the drug, does the firm sell more Zepbound? Unlike Novo's Wegovy, Lilly claims to have no shortage of the drug, and the FDA backs them up on that.
Thoughts
The stock is back to trading at 60 times forward-looking earnings. For the second quarter, reported in early August, Lilly crushed Wall Street's expectations for both earnings and revenue as that revenue grew 36% year over year. The firm also increased its full year guidance for revenue by about $3 billion to $45.4 billion to $46.6 billion and its full-year guidance for adjusted earnings per share by about $2.60 to $16.10 to $16.60. That set the stock on fire, and it's been on fire ever since. Lilly will report the current quarter in late October.
Technical Warning
Remember the long ascending channel that worked so well for us through 2023 and halfway into 2024? That channel broke when the stock broke in July. Now, we'll zoom in...
Now, I'd be a fool to say that I know what will happen here. Relative strength is solid, but not quite technically overbought. The daily MACD is still postured bullishly. The stock has retaken both its 21-day EMA and 50-day SMA. All positives.
However, it looks like LLY may be forming a double top pattern with a $747 pivot. This is a bearish pattern of reversal. It doesn't always work, but it is enough to keep me from jumping back on the bandwagon. The pattern would put the downside target in the $670s. That may be a pipe dream for entry, but I am wary at these prices. Where do I consider the double top failed? Probably around $980.
Less than 1% of the float is sold short. Short some here? I might. Just fun-sized. I would not bet real money against this name. Oh, and that short would come with hard panic point up $20 from net basis. None of this 8% rule stuff on a stock trading at close to $1,000 per share.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
